The South Korean National Pension Service (NPS) has invested about 100 billion won ($83 million) in the debt sale backing private equity firm VIG Partners’ acquisition of Preedlife Co Ltd, sources said on July 13.

VIG Partners agreed to buy 100% of the funeral service company for 300 billion won in April, before completing the acquisition at the end of June. The acquisition was financed partly through VIG’s fourth blind-pool fund and the remainder through loans securitized and sold to a group of institutional investors including NPS.

It was surprising NPS participated in debt acquisition financing, industry watchers said. Currently in the domestic acquisition financing market, the senior tranche loan is expected to generate an annual return of 4% to 5%, which is much lower than NPS’ 8% to 9% required rate of return for alternative investments.

The pension fund explained investment opportunities in debt financing for acquisitions can be positively considered if the acquired company, such as Preedlife, has strong growth potential and a stable business model. With this investment, NPS is expected to earn about 8% rate of return through a mix of the senior tranche and lower-rated mezzanine tranche loans.

VIG Partners is the first private equity firm to have included domestic funeral service providers in its portfolio. After completion of the deal last month, VIG Partners merged Preedlife with Jounlife (the midsized funeral service company acquired by VIG Partners in 2016) to create the largest funeral service provider in the country.

NPS, as VIG Partners did, would have wanted to capitalize on the growth potential of the funeral industry amid an aging population, industry watchers said. The industry is experiencing consolidation as market players have circled one another to gain scale.

Both Preedlife and Jounlife had strong financial profiles, which also likely played a role in NPS’ investment decision. At the end of 2019 the risk-based capital (RBC) ratio and debt-to-asset ratio were 105% and 95% for Preedlife and 114% and 88% for Jounlife, compared to the industry average of 91% and 108%. A higher RBC ratio and a lower debt-to-asset ratio mean a stronger capital position.

Preedlife is expected to grow rapidly in the future. Apart from operating income growth, income from investment of premiums could increase exponentially as the company’s accumulated premium income rises faster. Preedlife recently hired a chief investment officer to oversee the management of funds. (Reporting by Hee-yeon Han)